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Some annuities, such as indexed annuities and many variable annuities, are problematic, charging steep fees and/or carrying restrictive terms. Immediate or deferred fixed annuities, though, sport fewer drawbacks and are well worth considering.

Know what you're getting into with an annuity -- don't end up surprised. Image source: Getty Images.

Generations before us could often look forward to pension income to support them in old age. Those days are gone, though, with the vast majority of big companies now shifting the responsibility of saving for retirement to their employees, typically via 401(k) plans.

Still, you may be able to essentially buy yourself pension-like income via an annuity. That can serve many people well, but read this before you sign up for one.

Annuity basics

An annuity is essentially a contract with an insurance company. You'll generally pay the insurer a sum of money -- often a hefty sum -- and in exchange for that, the insurer will commit to sending you regular payments immediately or in the future for the duration of the contract. Many contracts offer payments until the end of your life, or if you want, until both you and your spouse have died.

It's critical to understand that there are many different kinds of annuities, because some are much more problematic than others. Here are the main kinds of annuities: immediate vs. deferred (paying you immediately vs. starting at some point when you're older), fixed vs. variable (certain payouts vs. payouts tied to the performance of the market or part of the market), and lifetime vs. fixed period (paying until death, or paying for a certain span of time).

Why an annuity can serve you well

The regular income is the main reason why you might want an annuity, but there are other benefits, too. How much can you expect to receive? Well, a 70-year-old couple might be able to secure around $1,000 per month for as long as at least one of them is alive for a $200,000 purchase price. That, coupled with Social Security income, can help them stay afloat.

A 70-year-old woman who spends $100,000 may get an immediate fixed annuity paying about $560 per month, or $6,720 per year. (Women can generally expect lower payouts -- because they tend to live longer than men.)

Deferred fixed annuities are also well worth considering because they can pay you more. A 70-year-old woman who spends $100,000 on a deferred fixed annuity that will start paying when she turns 80 can expect around $1,450 per month. That's quite a bit more because the insurance company can invest the premium for a few years and will be paying for fewer years, too (on average).

These annuities can help prevent you from running out of money in retirement, and therefore offer a big benefit: peace of mind and better sleep at night. Related to that is the fact that, as we age, we often become less able to make sound financial decisions. An annuity takes away much responsibility, letting a retiree just sit back and collect annuity checks each month.

Consider, too, that fixed-annuity income takes stock-market risk out of the equation. If the market tanks, you're not likely to see any interruption in your payments.

Learn the pros and cons of annuities so you don't end up with regrets. Image source: Getty Images.

Why you might not want to get an annuity

Of course, annuities can present some drawbacks, too. For example:

Some annuities, such as indexed annuities and many variable annuities, are problematic and unsuitable for many people because they charge steep fees and/or carry restrictive terms. Immediate or deferred fixed annuities, though, sport fewer drawbacks and are well worth considering.

The payments you're offered when annuity shopping largely depend on prevailing interest rates. We've been in a period of low rates for a long time now, making annuities somewhat less attractive. Many expect rates to rise in the coming years, though, so better deals likely lie ahead.

Annuity income is not 100% guaranteed. The insurer promises to pay you according to the terms of the contract, but that promise is only as reliable as the insurance company that sells it. Thus, seek out the best-rated insurers and perhaps divide your purchase money between a few of them. For example, if you were going to spend $300,000 on annuities, you might buy a $100,000 contract from three different highly rated insurers.

There are many people out there trying to sell annuities, and some of them engage in misconduct. A recent study examined the records of more than 1 million financial advisors and former financial advisors between 2005 and 2015 and found that a whopping 7% of them -- 87,000 in total -- had been disciplined for misconduct or fraud. The top complaints were: unsuitable advice (21.3%), misrepresentation (17.7%), unauthorized activity (15.1%), omission of key facts (11.6%), fees/commissions (8.7%), and fraud (7.9%). The specific products involved in the most misconduct were insurance (13.8%), annuities (8.6%), stocks (6%), and mutual funds (4.6%). You're not likely to experience trouble, but it's good to be careful. It's smart to find out whether your advisor is held to the "fiduciary" standard, which requires the advisor to offer advice that is in the client's best interest. Non-fiduciaries can get away with simply offering suitable recommendations that may earn them bigger commissions than better recommendations would. You can also just skip the salesperson and contact a trusted insurer on your own. Your brokerage might even offer annuities.

It's also worth remembering that you can build other kinds of income streams for yourself, such as via dividend-paying stocks. That income is far less guaranteed, but spreading your money across a bunch of solid blue chip stocks can reduce a lot of risk.

As you plan for your retirement, it's smart to at least consider a fixed annuity. Don't leave your retirement up to chance, or up to Social Security. The average Social Security benefit, after all, was recently $1,348 per month, or about $16,000 per year. (The maximum benefit for those retiring at full retirement age was recently $2,639 -- or about $32,000 for the whole year.) If you don't expect to receive enough Social Security income to fully support you in retirement, you'll need to be planning for other income streams.

Author

Selena Maranjian has been writing for the Fool since 1996 and covers basic investing and personal finance topics. She also prepares the Fool's syndicated newspaper column and has written or co-written a number of Fool books. For more financial and non-financial fare (as well as silly things), follow her on Twitter... Follow @SelenaMaranjian